Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
This discussion provides an understanding of our financial results and condition by focusing on changes in certain key
measures from year to year. We have organized Managements Discussion and Analysis in the following sections:
|
|
Summary of 2012 Results
|
|
|
Liquidity and Capital Resources
|
|
|
Critical Accounting Estimates
|
You should read
the following discussion and analysis in conjunction with Item 6. Selected Financial Data above and with the financial statements and related notes included in Item 8. Financial Statements and Supplemental Data of
this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could contribute to such differences include, but are not
limited to, those discussed in Item 1A. Risk Factors.
18
Overview
We derive substantially all of our revenues from the delivery of laser vision correction procedures performed in our U.S. vision centers. Our revenues and operating results, therefore, depend on the
number of procedures performed and are impacted by a number of factors, including the following:
|
|
General economic conditions, consumer confidence and discretionary spending levels,
|
|
|
Our ability to generate patients through our arrangements with managed care companies, direct-to-consumer advertising, co-management and word-of-mouth referrals,
|
|
|
The availability of patient financing,
|
|
|
Our ability to manage equipment and operating costs, and
|
|
|
The impact of competitors and discounting practices in our industry.
|
Other factors that impact our revenues include:
|
|
Deferred revenue from the sale, prior to June 15, 2007, of separately priced acuity programs, and
|
|
|
Our mix of procedures among the different types of laser technology.
|
Because our revenues are primarily a function of the number of laser vision correction procedures performed and the pricing for these services, and many of our costs are fixed, our vision centers have a
relatively high degree of operating leverage. As a result, changes in our level of procedure volume can have a significant impact on our level of financial performance. The following table details the number of total procedures performed at our
vision centers during the last three fiscal years. Included within total procedure volume are laser vision correction, cataract and implantable collamer lens procedures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
First Quarter
|
|
|
20,987
|
|
|
|
18,857
|
|
|
|
19,066
|
|
Second Quarter
|
|
|
14,415
|
|
|
|
14,081
|
|
|
|
15,266
|
|
Third Quarter
|
|
|
11,510
|
|
|
|
12,444
|
|
|
|
11,497
|
|
Fourth Quarter
|
|
|
11,613
|
|
|
|
14,205
|
|
|
|
10,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year Procedures
|
|
|
58,525
|
|
|
|
59,587
|
|
|
|
56,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic conditions in the United States have resulted in cautious high-end discretionary
spending for many consumers that has continued to impact our procedure volume and operating results. We have no immediate plans to open any new full service vision centers until we move closer to sustained profitability in our core laser vision
correction business. We will open a satellite Lasik
Plus
®
vision center in northern New Jersey during the
first quarter of 2013 to leverage our marketing spending in that market. The satellite center will perform pre-operative and post-operative exams, providing added convenience for patients who live considerable distances from our full-service
Lasik
Plus
®
vision center in that market. In addition to the use of satellite vision centers we have begun
to grow a network of optometrists and other health care providers to share in the care of those patients.
Operating Costs and
Expenses
Our operating costs and expenses include:
|
|
Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction, and per procedure license fees paid to
certain equipment suppliers of our excimer and femtosecond lasers,
|
|
|
Direct costs of services, including staff salaries, taxes and benefits, facility costs of operating laser vision correction centers, equipment lease and maintenance
costs, medical malpractice insurance costs, surgical supplies, financing charges for third-party patient financing, and other costs related to revenues,
|
|
|
General and administrative costs, including corporate headquarters and call center staff expense and other overhead costs,
|
|
|
Marketing and advertising costs, and
|
|
|
Depreciation of equipment and leasehold improvements.
|
19
Summary of 2012 Results
Key financial highlights for the year ended December 31, 2012 include (all comparisons are with 2011):
|
|
Revenues were $101.5 million compared with $103.0 million; adjusted revenues increased slightly to $99.0 million from $98.6 million.
|
|
|
Procedure volume was 58,525 procedures compared with 59,587 procedures.
|
|
|
Operating loss was $9.3 million compared with operating loss of $6.5 million; adjusted operating loss was $11.6 million compared with adjusted operating loss of $10.5
million. Operating loss and adjusted operating loss for 2012 included $1.7 million in restructuring and impairment charges, a $2.2 million loss from the start-up operation of the cataract services expansion, and a $239,000 gain on sale of assets,
offset by a $1.0 million decline in depreciation expense. Operating loss and adjusted operating loss for 2011 included $140,000 in impairment and restructuring charges and a $618,000 gain on sale of assets.
|
|
|
Marketing cost per eye was $394 compared with $381.
|
|
|
Net loss was $8.5 million, or $0.45 per share, compared with a net loss of $6.2 million, or $0.33 per share.
|
|
|
Cash and investments totaled $34.5 million as of December 31, 2012, compared with $44.8 million as of December 31, 2011. The cash and investment balance for
2012 was impacted primarily by $4.0 million used to retire all outstanding debt prior to maturity, $2.8 million invested in developing the cataract services business, $2.1 million of changes in working capital, and $1.4 million of cash used in other
LASIK-related activity.
|
We have provided both adjusted revenues and operating losses as a means of measuring performance that
adjusts for the non-cash impact of accounting for separately priced extended warranties. We believe that the adjusted information better reflects operating performance and therefore is more meaningful to investors. We provide below a reconciliation
of revenues and operating losses reported in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported U.S. GAAP
|
|
$
|
101,493
|
|
|
$
|
102,983
|
|
|
$
|
99,825
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior deferred revenue
|
|
|
(2,516
|
)
|
|
|
(4,376
|
)
|
|
|
(6,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenues
|
|
$
|
98,977
|
|
|
$
|
98,607
|
|
|
$
|
93,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported U.S. GAAP
|
|
$
|
(9,311
|
)
|
|
$
|
(6,538
|
)
|
|
$
|
(21,967
|
)
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of prior deferred revenue
|
|
|
(2,516
|
)
|
|
|
(4,376
|
)
|
|
|
(6,151
|
)
|
Amortization of prior professional fees
|
|
|
252
|
|
|
|
438
|
|
|
|
615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating loss
|
|
$
|
(11,575
|
)
|
|
$
|
(10,476
|
)
|
|
$
|
(27,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
Revenues
In 2012, revenues decreased by $1.5 million, or 1.4%, to $101.5 million, from
$103.0 million in 2011, compared to an increase of $3.2 million, or 3.2% in 2011. In 2012, adjusted revenues were $99.0 million compared with $98.6 million in 2011 and $93.7 million in 2010. Procedure volume decreased by approximately 2% in 2012 to
58,525, compared to 59,587 in 2011. The components of the revenue change include the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
(Decrease) increase in revenues from same-store procedure change
|
|
$
|
(1,757
|
)
|
|
$
|
11,557
|
|
|
$
|
(15,220
|
)
|
Decrease in revenue from closed vision centers
|
|
|
|
|
|
|
(6,822
|
)
|
|
|
(11,278
|
)
|
Impact from increase in average selling prices, before revenue deferral
|
|
|
2,127
|
|
|
|
198
|
|
|
|
66
|
|
Change in deferred revenues
|
|
|
(1,860
|
)
|
|
|
(1,775
|
)
|
|
|
(2,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in revenues
|
|
$
|
(1,490
|
)
|
|
$
|
3,158
|
|
|
$
|
(29,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The adjusted revenue per procedure, which excludes the impact of deferred revenue from the sale of
separately priced acuity programs, increased to $1,691 in 2012 from $1,655 in 2011 and $1,652 in 2010.
Although 2012 industry procedure
volume increased compared to both 2011 and 2010, industry sources indicate that economic uncertainty and other macroeconomic factors continue to impact negatively the entire laser vision correction industry. During 2012 we experienced challenges
with our direct-to-consumer marketing model as we attempt to optimize our media buys and identify messages that better compete with local ophthalmologists who control about 60% of the LASIK market. Despite these challenges we experienced
improvements to our operational metrics from efforts to improve patient interactions and organizational effectiveness. We experienced an increase in preoperative appointment show rate in 2012 compared to 2011 and 2010 and conversion rates in 2012
compared to 2011 but were down to 2010 results. Treatment show rate remained stable in 2012 compared with 2011 and 2010.
Amortization of
prior deferred revenues for 2012, 2011 and 2010 was $2.5 million, $4.4 million and $6.2 million, respectively.
Operating Costs
Our operating costs correlate in part with revenues and procedure volumes due to the fact that some of our costs are variable and some are
fixed. The following table shows the change in components of operating expenses between 2012, 2011 and 2010 in dollars and as a percentage of revenues for each period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease/
|
|
|
|
|
|
|
|
|
Decrease/
|
|
|
|
2012
|
|
|
2011
|
|
|
(Increase)
|
|
|
2010
|
|
|
(Increase)
|
|
Medical professional and license fees
|
|
$
|
23,715
|
|
|
|
23.4
|
%
|
|
$
|
24,628
|
|
|
|
23.9
|
%
|
|
$
|
913
|
|
|
$
|
24,161
|
|
|
|
24.2
|
%
|
|
$
|
(467
|
)
|
Direct costs of services
|
|
|
44,348
|
|
|
|
43.7
|
%
|
|
|
43,048
|
|
|
|
41.8
|
%
|
|
|
(1,300
|
)
|
|
|
46,631
|
|
|
|
46.7
|
%
|
|
|
3,583
|
|
General and administrative expenses
|
|
|
13,442
|
|
|
|
13.2
|
%
|
|
|
13,942
|
|
|
|
13.5
|
%
|
|
|
500
|
|
|
|
13,956
|
|
|
|
14.0
|
%
|
|
|
14
|
|
Marketing and advertising
|
|
|
23,055
|
|
|
|
22.7
|
%
|
|
|
22,678
|
|
|
|
22.0
|
%
|
|
|
(377
|
)
|
|
|
24,114
|
|
|
|
24.2
|
%
|
|
|
1,436
|
|
Depreciation
|
|
|
4,736
|
|
|
|
4.7
|
%
|
|
|
5,703
|
|
|
|
5.5
|
%
|
|
|
967
|
|
|
|
9,408
|
|
|
|
9.4
|
%
|
|
|
3,705
|
|
Impairment and restructuring charges
|
|
|
1,747
|
|
|
|
1.7
|
%
|
|
|
140
|
|
|
|
0.1
|
%
|
|
|
(1,607
|
)
|
|
|
5,484
|
|
|
|
5.5
|
%
|
|
|
5,344
|
|
Medical professional and license fees
Medical professional and license fees in 2012 decreased $913,000, or 3.7%, from 2011. License fees decreased $941,000 as a result of decreased enhancement costs, partially offset by lower volume rebates
in 2012 and increased costs from our cataract services business. The amortization of the deferred medical professional fees associated with the sale of separately priced extended acuity programs also impacted medical professional and license fees.
We amortized deferred medical professional fees attributable to prior years of $252,000 in 2012 compared to $438,000 in 2011.
Medical
professional and license fees in 2011 increased $467,000, or 1.9%, from 2010. Medical professional fees increased $466,000, or 4.7%, due to increased costs and physician fees associated with increased procedure volumes and revenues. License fees
increased slightly as a result of increased procedure volumes in 2011 offset by lower volume rebates on purchases and decreased enhancement costs. The amortization of the deferred medical professional fees associated with the sale of separately
priced extended acuity programs also impacted medical professional and license fees. We amortized deferred medical professional fees attributable to prior years of $438,000 in 2011 compared to $615,000 in 2010.
Direct costs of services
Direct costs
of services in 2012 increased by $1.3 million, or 3.0%, from 2011. The increase was due primarily to salaries, benefits, and stock compensation expense of $1.7 million related to filling open and new positions, including our business expansion roles
as well as merit increases in 2012. Additional increases included insurance costs of $292,000 due to actuarial adjustments based on our historical claim activity and bad debt expense of $168,000 as a result of changes in financing plan mix.
Partially offsetting the increases was a decrease in rent expense of $337,000 from recent favorable negotiations of leases and state and local taxes of $247,000 due to unfavorable audit assessments in the prior year.
Direct costs of services in 2011 decreased by $3.6 million, or 7.7%, from 2010. Our decision to close under-performing laser vision centers and other
cost reduction efforts in 2010 drove lower direct costs of services primarily in the areas of salaries and employee incentives of $1.3 million and rent and utilities costs of $1.4 million. We also benefited from a decline in financing fees, laser
rent, bad debt expense, insurance, telecommunications, and state and local taxes. These decreases in direct costs of services were offset partially by increased stock-based compensation and travel costs. Direct costs as a percentage of revenues
decreased to 41.8% in 2011 from 46.7% in 2010.
21
General and administrative
General and administrative expenses decreased $500,000, or 3.6% from 2011. The decrease was due primarily to reductions in professional services costs from additional spending for growth initiatives in
2011, partially offset by $404,000 in increased sales tax costs resulting from a favorable state sales tax audit settlement in 2011. General and administrative expenses decreased 0.3% to 13.2% as a percentage of revenues.
General and administrative expenses of $13.9 million in 2011 remained relatively flat compared to 2010. During the year we incurred approximately
$528,000 in additional spending for growth initiatives offset by $433,000 in reduced sales tax costs resulting from a favorable state sales tax audit settlement. General and administrative expenses decreased 0.5% to 13.5% as a percentage of revenues
due to an increase in revenues.
Marketing and advertising expenses
Marketing and advertising expenses in 2012 increased $377,000, or 1.7%, from 2011. These expenses constituted 22.7% of revenues during 2012, up from 22.0% in 2011. Marketing cost per eye increased to $394
for 2012 from $381 in 2011. Adjusted marketing cost per eye, which excludes the impact of cataract services marketing spend of $491,000, increased to $387 compared with $379 in 2011. Marketing and advertising expenses in 2011 decreased $1.4 million,
or 6.0%, from 2010. These expenses constituted 22.0% of revenues during 2011, down from 24.2% in 2010. Marketing cost per eye decreased to $381 for 2011 from $425 in 2010, due primarily to more effective spending on media.
We adjust our marketing spend levels continually in an attempt to align spending levels with consumer demand. We are continuing to work to develop more
efficient marketing techniques and expand local initiatives as a means to attract patients. Our future operating profitability will depend in large part on the success of our efforts in this regard.
Depreciation expense
Depreciation
expense in 2012 decreased by $967,000, or 17.0%, compared to 2011. Depreciation expense in 2011 decreased by $3.7 million, or 39.4%, compared to 2010. The decline in depreciation expense continues to reflect a lower depreciable asset base as a
result of reduced capital expenditures since 2008 and the disposal of certain equipment and leasehold improvements from closed vision centers.
Impairment and restructuring charges
In
2012, we recorded impairment charges to reduce the carrying amount of long-lived assets by approximately $617,000 compared to charges of $104,000 and $1.7 million in 2011 and 2010, respectively. The 2012 impairment charge resulted from of our
decision to close one under-performing vision center in December 2012, convert another center into a satellite vision center and consolidate our call center into the primary corporate headquarters during January of 2013. The 2011 impairment charge
reduced the carrying value of certain assets held for use in a laser vision correction center. The 2010 impairment charge resulted from our decision to consolidate vision center operations in four markets and close vision centers in six
underperforming markets (including one licensed facility) in order to preserve cash.
Restructuring charges in 2012 of $1.1 million resulted
primarily from our decision to close one under-performing vision center, convert one into a satellite vision center and to reduce our workforce in our continued efforts to reduce costs and increase operational efficiencies. Restructuring charges in
2011 were $36,000, comprised primarily of adjustments to previous estimates for contract termination costs for previously closed vision centers and additional severance costs. Restructuring charges in 2010 of $3.8 million resulted primarily from the
consolidation of vision center operations, closure of underperforming vision centers, and workforce reductions in our continued efforts to reduce costs and increase operational efficiencies.
Gain on sale of assets
We sold lasers and other assets held for sale for a gain of
approximately $239,000 in 2012 compared to $618,000 in 2011 and $2.0 million in 2010. The decreases are due to limited vision center closures in 2011 and 2012, which resulted in a decline in assets held for sale.
Non-operating income and expenses
We
recorded net investment income of $656,000 in 2012 compared to $470,000 in 2011. The increase was due primarily to increases in patient financing interest income of $199,000 on higher average accounts receivable and a reduction in interest expense
of $138,000 due to the payoff of all outstanding debt in 2012, in advance of the original maturity date. Partially offsetting these increases is a loss on sale of investment securities related to the disposal of our auction rate securities during
2012.
We recorded net investment income of $470,000 in 2011 compared to $1.4 million in 2010. The decrease was due primarily to the gain on
sale of equity investments of $993,000 that occurred in 2010 compared to a gain of $52,000 that was recognized on the redemption of various securities in 2011. Patient financing interest income declined $119,000 on lower average accounts receivable,
and interest expense declined by $223,000 due to a favorable state sales tax audit settlement and lower borrowing levels in 2011 compared to 2010.
22
Income taxes
Our effective income tax rate was (1.6%) during 2012 compared to 2.1% during 2011 and 0.2% during 2010. Our effective tax rate was impacted significantly by a valuation allowance against all of our
net deferred tax assets during these years. We maintain a full valuation allowance on our net deferred tax assets due to increased uncertainty with respect to our ability to realize the net deferred tax assets in future periods. The impact of the
valuation allowance on our effective tax rate was 38.5%, 36.2% and 37.4%, respectively. Our provision for income taxes in 2012 included a benefit of lapsed statutes related to uncertain tax positions and the interest previously recorded on these
positions. The benefit was partially offset by interest on uncertain tax positions and state taxes in one jurisdiction. Our provision for income taxes in 2011 included interest on uncertain tax positions and state taxes in one jurisdiction.
Liquidity and Capital Resources
The following table summarizes our cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(5,088
|
)
|
|
$
|
(3,501
|
)
|
|
$
|
1,358
|
|
Investing activities
|
|
|
22,372
|
|
|
|
6,353
|
|
|
|
(709
|
)
|
Financing activities
|
|
|
(4,304
|
)
|
|
|
(3,544
|
)
|
|
|
(6,039
|
)
|
Net effect of exchange rate changes on cash and cash equivalents
|
|
|
105
|
|
|
|
(90
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
13,085
|
|
|
$
|
(782
|
)
|
|
$
|
(5,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in operating activities were $5.1 million in 2012 compared to $3.5 million in 2011 and $1.4 million
provided by operations in 2010. Our 2012 cash flow from operations includes a $2.0 million investment in developing our cataract business expansion, $2.1 million in changes to working capital and $1.4 million in cash uses from our LASIK
operations. In 2010 cash from operations included a federal tax refund of $11.8 million. We did not receive a federal tax refund in 2011 or 2012 because we are in a net operating loss carryforward position. Our cash flow from operations depends
primarily on procedure volume.
Cost control and cash conservation efforts have continued to provide significant savings in discretionary
areas. We continue to closely manage working capital with particular focus on ensuring timely collection of outstanding patient receivables and management of our trade payable obligations. Working capital at December 31, 2012 amounted to $21.1
million compared to $29.7 million at the end of 2011 (excluding debt obligations due within one year). Liquid assets (cash and cash equivalents, short-term investments, and accounts receivable) amounted to 188.8% of current liabilities at
December 31, 2012, compared to 187.1% at December 31, 2011.
We believe that available cash and short-term investments will provide
sufficient cash reserves and liquidity to fund our working capital needs, capital expenditures and other obligations for at least the next 12 months. In the current challenging economic environment, we are seeking to balance cash conservation
against our longer-term objective of managing to profitability and growth as the economy improves. The average number of procedures required company-wide to reach breakeven cash flow, after capital expenditures, is approximately 58,000 per year
compared to 70,000 per year at December 31, 2011. The number of procedures that we will perform in 2013 or thereafter is uncertain.
We continue to offer our own sponsored patient financing. As of December 31, 2012, we held $3.9 million in patient receivables, net of allowance for
doubtful accounts, which was an increase of $734,000, or 23.4%, from December 31, 2011, due primarily to continued investment in our guaranteed financing advertising program. We continually monitor the allowance for doubtful
accounts and adjust our lending criteria or require greater down payments if our experience indicates it is necessary. However, our ability to collect patient accounts depends in part on overall economic conditions. Bad debt expense was
approximately 1% of revenue in 2012, 2011 and 2010.
During 2012, we purchased $39.7 million of investment securities and received proceeds
from the sale of investment securities of $62.9 million as a result of maintaining greater cash liquidity in money market funds. Our investment portfolio at December 31, 2012 consists of certificates of deposit with initial maturities greater
than 90 days.
During 2012 we redeemed our remaining auction rate securities with par value of $1.1 million at 75% of par value. At
December 31, 2011, we held at par value $1.1 million, of various auction rate securities. The assets underlying the auction rate instruments were primarily municipal bonds. In 2011, issuers called at par $25,000 of the related securities, and
we redeemed an additional $1.1 million at 81% of original par value. We no longer hold any auction rate securities.
23
In April 2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC to finance the
majority of the femtosecond lasers which we purchased. In June 2012, we paid off all outstanding debt in advance of the original maturity date, reducing our total debt to zero. Our outstanding debt was $4.0 million as of December 31, 2011, of
which $3.0 million was due within 12 months.
In March and April 2009, we entered into five-year lease agreements with Alcon and AMO,
respectively, for new excimer lasers which allowed us to standardize our excimer treatment platforms. As part of the transactions, we disposed of our Bausch & Lomb lasers and related capital lease obligations. We received cash payments from
the lessors and have deferred these amounts and are recognizing them ratably over the lease terms. We include the unrecognized portion in Accrued liabilities and other for the current portion and in Deferred license fees for
the long-term portion in our Consolidated Balance Sheets at December 31, 2012 and 2011. The AMO laser lease qualified as a capital lease, and the Alcon laser lease qualified as an operating lease.
We had assets held for sale of $24,000 and $46,000 at December 31, 2012 and 2011, respectively, related to unused lasers and other equipment from
our closed vision centers. During 2012, we sold some of our assets held for sale with a combined net book value of $88,000 for total proceeds of approximately $327,000, resulting in a gain of approximately $239,000, before tax.
We did not open any new full service vision centers in 2012 or 2011. Capital expenditures of $1.2 million in 2012 declined from $1.5 million in 2011 as
we curtailed vision center relocations. The following is a list of the full service vision centers that we closed, indicated in parenthesis, and satellite vision centers which we opened in the last two fiscal years:
|
|
|
|
|
2012
|
|
2011
|
|
Annapolis, MD
|
|
|
(Naperville, IL
|
)
|
Naperville, IL
|
|
|
|
|
Tempe, AZ
|
|
|
|
|
Woodstock, GA
|
|
|
|
|
(Annapolis, MD)
|
|
|
|
|
(Chandler, AZ)
|
|
|
|
|
(Seattle, WA)
|
|
|
|
|
The following table aggregates our obligations and commitments to make future payments under existing contracts at
December 31, 2012 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations (a)(b)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
More than
5 years
|
|
Operating lease obligations
|
|
$
|
23,766
|
|
|
$
|
8,097
|
|
|
$
|
8,926
|
|
|
$
|
5,482
|
|
|
$
|
1,261
|
|
Purchase commitments
|
|
|
1,039
|
|
|
|
397
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
Other obligations
|
|
|
365
|
|
|
|
225
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,170
|
|
|
$
|
8,719
|
|
|
$
|
9,708
|
|
|
$
|
5,482
|
|
|
$
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
We have excluded contractual obligations for which the ultimate settlement of quantities or prices are not fixed and determinable.
|
(b)
|
We also excluded from the table $508,000 of unrecognized tax benefits due to the uncertainty regarding the timing of future potential cash flows.
|
Critical Accounting Estimates
Note 1 to the Consolidated Financial Statements more fully describes our accounting policies. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We
believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial position and results of operations and require managements most difficult,
subjective and complex judgments.
Revenue Recognition, Patient Receivables and Allowance for Doubtful Accounts
We recognize revenues as services are performed and persuasive evidence of an arrangement for payment exists. Additionally, revenue is recognized when the
price is fixed and determinable and collectability is reasonably assured. We deferred revenues associated with separately priced acuity programs and recognize them over the period in which future costs of performing post-surgical enhancement
procedures are expected to be incurred because we have sufficient experience to support the costs associated with future enhancements that will be incurred on other than a straight-line basis. Effective June 15, 2007, we changed our pricing
model and no longer offer separately priced acuity options. We report all revenues net of tax assessed by applicable governmental authorities.
24
A significant percentage of our patients finance some or all of the cost of their procedure. We provide
financing to some of our patients, including those who could not otherwise obtain third-party financing. We derive approximately 6% of our revenues from patients to whom we have provided direct financing. The terms of our direct financing require
the patient to pay an up-front fee, which is intended to cover some or all of our variable costs, and then generally we deduct the remainder automatically from the patients checking account over a period of 12 to 36 months. Our direct
financing program exposes us to significant credit risks, particularly given that patients who participate in the program generally have not been deemed creditworthy by third-party financing companies. To ensure that collectability is reasonably
assured at the time of the service offering, we actively monitor our bad debt experience and adjust underwriting standards as necessary. In addition to increasing underwriting standards in 2009, which included an increase in the minimum down payment
required, we took steps in 2011 and 2010 to continue to improve collection results from internally financed patients through the use of credit scores to qualify patients for appropriate financing options.
Based upon our own experience with patient financing, we have established an allowance for doubtful accounts as of December 31, 2012 of $1.7 million
against patient receivables of $5.5 million, compared to an allowance of $1.7 million against patient receivables of $4.8 million at December 31, 2011. We reserve for all patient receivables that remain open past the financial maturity date and
to provide reserves for patient receivables prior to the maturity date so as to bring patient receivables, net of reserves, down to the estimated net realizable value based on historical collectability rates, recent default activity and the current
credit environment. Any excess in our actual allowance for doubtful account write-offs over our estimated bad debt reserve, would adversely impact our results of operations and cash flows. To the extent that our actual allowance for doubtful account
write-offs are less than our estimated bad debt reserve, it would favorably impact our results of operations and cash flows. We have established an allowance for doubtful accounts as of December 31, 2012 of $340,000 against other accounts
receivables of $783,000. At December 31, 2011, there was an allowance for doubtful accounts of $298,000 against other accounts receivables of $2.3 million.
For patients whom we internally finance, we charge interest at market rates. Finance and interest charges on patient receivables were $820,000 in 2012, $621,000 in 2011 and $740,000 in 2010. We include
these amounts in Net investment income and other within the Consolidated Statements of Operations and Comprehensive Loss.
Insurance Reserves
We maintain a
captive insurance company to provide professional liability insurance coverage for claims brought against us and our optometrists after December 17, 2002. In addition, our captive insurance companys charter allows it to provide
professional liability insurance for our ophthalmologists, none of whom are currently insured by the captive. We use the captive insurance company for both primary insurance and excess liability coverage. Our captive insurance company is subject to
a number of pending claims. We consolidate the financial statements of the captive insurance company with our financial statements because it is a wholly-owned enterprise. As of December 31, 2012 and 2011, we maintained insurance reserves of
$6.6 million and $7.2 million, respectively, which represent primarily an actuarially determined estimate of future costs associated with claims filed as well as claims incurred but not yet reported. We recorded $871,000 and $951,000 of the total
insurance reserve as a current liability in Accrued liabilities and other at December 31, 2012 and 2011, respectively. The $603,000 decrease in the overall reserve was driven principally by favorable claim experience and claim
payments in 2012, partially offset by reserves for new claims. Our actuaries determine loss reserves by comparing our historical claim experience to comparable insurance industry experience. Since the inception of the captive insurance company in
2002, it has disbursed total claims and legal expenses of approximately $7.7 million.
Our actuaries determine our loss reserves based on our
historical claim experience, comparable industry experience and recent trends that would impact the ultimate settlement of claims. We believe that the recorded loss reserves are reasonable based on this analysis. However, due to the uncertainties
inherent in the determination of these liabilities, the ultimate settlement of claims incurred through December 31, 2012 could differ from the amounts recorded. We will record any adjustment to these estimates in the period determined.
Accrued Enhancement Expense
We include participation in our Lasik
Plus
Advantage Plan
®
(acuity program) in the base surgical price for substantially all of our patients. Under the acuity program, if determined to be medically appropriate, we provide post-surgical enhancements free of charge should the patient not achieve
the desired visual correction during the initial procedure. Under this pricing structure, we account for the acuity program as a warranty obligation. Accordingly, we accrue the costs expected to be incurred to satisfy the obligation as a liability
and direct cost of service at the point of sale given our ability to reasonably estimate such costs based on historical trends and the satisfaction of all other revenue recognition criteria.
We record the post-surgical enhancement accrual based on our best estimate of the number and associated cost of the procedures to be performed. Each month, we review the enhancement accrual and consider
factors such as procedure cost and historical procedure volume when determining the appropriateness of the recorded balance.
25
The key assumption we used to determine our enhancement accrual is the rate at which enhancements are likely
to occur. We determine the rate based on an analysis of historical enhancements performed compared to the original procedure date. An incremental 1.0% change in our enhancement rate would have resulted in an approximate $769,000 change to the
enhancement accrual at December 31, 2012.
Impairment of Property and Equipment
We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value might not be recoverable. We write
down recorded values of property and equipment that are not expected to be recovered through undiscounted future net cash flows to fair value, which is generally determined from estimated discounted cash flows for assets held for use. In evaluating
the recoverability of our recorded values and property and equipment, we analyzed the future undiscounted net cash flows for each of our laser vision correction centers, the lowest level for which there are identifiable cash flows. We assumed a cash
flow period of three years to determine the cash flow forecasts, which corresponds to the remaining useful life of the primary assets within the laser vision correction centers.
During 2012, we recognized $617,000 in impairment charges due to reducing the carrying amount of long-lived assets held for use because we relocated our patient communication center to our corporate
headquarters and closed one under-performing vision center. Based on current estimates, we believe the carrying amount for our remaining property and equipment is recoverable through future undiscounted cash flows. Because of market conditions, it
is reasonably possible that our estimate of discounted cash flows may change in the near term resulting in the need to adjust our determination of fair value or recoverability.
Deferred Tax Valuation Allowance
U.S. GAAP requires a company to establish a valuation
allowance for deferred tax assets when it is more-likely-than-not that the deferred tax asset will not be realized. Deferred tax assets may be realized through future reversals of existing taxable temporary differences, future taxable income,
taxable income in prior carryback year(s) if carryback is permitted, and tax planning strategies.
We considered all positive and negative
evidence in determining whether or not the deferred tax assets are more-likely-than-not to be realized, including the current economic conditions. After considering all of the evidence, we believe that reliance on future projections of income is no
longer sufficient to support realization of our deferred tax assets. Accordingly, we maintain a valuation allowance against our net deferred tax assets because we believe that it is not more-likely-than-not that our net deferred tax assets will be
utilized. The valuation allowance was $26.4 million and $23.4 million at December
31, 2012 and 2011, respectively.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
27
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of LCA-Vision Inc.
We have audited the accompanying consolidated balance sheets of LCA-Vision Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss,
stockholders investment, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of LCA-Vision Inc.s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LCA-Vision
Inc. at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LCA-Vision Inc.s internal
control over financial reporting as of December 31, 2012, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 13, 2013 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cincinnati, Ohio
March 13, 2013
28
LCA-VISION INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,653
|
|
|
$
|
18,568
|
|
Short-term investments
|
|
|
2,804
|
|
|
|
25,311
|
|
Patient receivables, net of allowances of $1,019 and $1,035
|
|
|
2,810
|
|
|
|
2,366
|
|
Other accounts receivable, net
|
|
|
443
|
|
|
|
1,974
|
|
Prepaid expenses and other
|
|
|
3,318
|
|
|
|
4,254
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
41,028
|
|
|
|
52,473
|
|
Property and equipment
|
|
|
64,964
|
|
|
|
70,760
|
|
Accumulated depreciation
|
|
|
(58,584
|
)
|
|
|
(60,123
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
6,380
|
|
|
|
10,637
|
|
Long-term investments
|
|
|
|
|
|
|
902
|
|
Patient receivables, net of allowances of $634 and $634
|
|
|
1,059
|
|
|
|
769
|
|
Other assets
|
|
|
501
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,968
|
|
|
$
|
66,433
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Investment
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8,046
|
|
|
$
|
8,103
|
|
Accrued liabilities and other
|
|
|
11,060
|
|
|
|
12,175
|
|
Deferred revenue
|
|
|
870
|
|
|
|
2,516
|
|
Debt obligations maturing within one year
|
|
|
|
|
|
|
2,978
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,976
|
|
|
|
25,772
|
|
Other long-term liabilities
|
|
|
3,023
|
|
|
|
4,443
|
|
Long-term debt obligations, less current portion
|
|
|
|
|
|
|
1,026
|
|
Long-term insurance reserves, less current portion
|
|
|
5,741
|
|
|
|
6,264
|
|
Deferred license fee
|
|
|
341
|
|
|
|
1,703
|
|
Deferred revenue
|
|
|
90
|
|
|
|
960
|
|
Stockholders investment
|
|
|
|
|
|
|
|
|
Common stock ($.001 par value; 25,291,637 shares issued and 19,050,504 and 18,858,147 shares outstanding,
respectively)
|
|
|
25
|
|
|
|
25
|
|
Contributed capital
|
|
|
179,543
|
|
|
|
177,287
|
|
Common stock in treasury, at cost (6,241,133 shares and 6,433,490 shares, respectively)
|
|
|
(111,395
|
)
|
|
|
(112,910
|
)
|
Accumulated deficit
|
|
|
(49,053
|
)
|
|
|
(38,720
|
)
|
Accumulated other comprehensive income
|
|
|
677
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
Total stockholders investment
|
|
|
19,797
|
|
|
|
26,265
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders investment
|
|
$
|
48,968
|
|
|
$
|
66,433
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
29
LCA-VISION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Revenues
|
|
$
|
101,493
|
|
|
$
|
102,983
|
|
|
$
|
99,825
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical professional and license fees
|
|
|
23,715
|
|
|
|
24,628
|
|
|
|
24,161
|
|
Direct costs of services
|
|
|
44,348
|
|
|
|
43,048
|
|
|
|
46,631
|
|
General and administrative
|
|
|
13,442
|
|
|
|
13,942
|
|
|
|
13,956
|
|
Marketing and advertising
|
|
|
23,055
|
|
|
|
22,678
|
|
|
|
24,114
|
|
Depreciation
|
|
|
4,736
|
|
|
|
5,703
|
|
|
|
9,408
|
|
Impairment charges
|
|
|
617
|
|
|
|
104
|
|
|
|
1,694
|
|
Restructuring charges
|
|
|
1,130
|
|
|
|
36
|
|
|
|
3,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,043
|
|
|
|
110,139
|
|
|
|
123,754
|
|
Gain on sale of assets
|
|
|
239
|
|
|
|
618
|
|
|
|
1,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(9,311
|
)
|
|
|
(6,538
|
)
|
|
|
(21,967
|
)
|
Net investment income and other
|
|
|
656
|
|
|
|
470
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(8,655
|
)
|
|
|
(6,068
|
)
|
|
|
(20,534
|
)
|
Income tax (benefit) expense
|
|
|
(138
|
)
|
|
|
130
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,517
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(20,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.45
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(1.10
|
)
|
Dividends declared per share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
18,982
|
|
|
|
18,811
|
|
|
|
18,680
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
105
|
|
|
$
|
(90
|
)
|
|
$
|
214
|
|
Unrealized investment (loss) gain
|
|
|
(11
|
)
|
|
|
11
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
$
|
94
|
|
|
$
|
(79
|
)
|
|
$
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(8,423
|
)
|
|
$
|
(6,277
|
)
|
|
$
|
(20,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
30
LCA-VISION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,517
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(20,577
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,736
|
|
|
|
5,703
|
|
|
|
9,408
|
|
Provision for loss on doubtful accounts
|
|
|
914
|
|
|
|
746
|
|
|
|
1,061
|
|
Loss (gain) on investments
|
|
|
68
|
|
|
|
(42
|
)
|
|
|
(943
|
)
|
Gain on sale of property and equipment
|
|
|
(239
|
)
|
|
|
(618
|
)
|
|
|
(1,962
|
)
|
Impairment charges
|
|
|
617
|
|
|
|
104
|
|
|
|
1,694
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
393
|
|
Stock-based compensation
|
|
|
2,060
|
|
|
|
1,676
|
|
|
|
1,272
|
|
Insurance reserves
|
|
|
(604
|
)
|
|
|
(191
|
)
|
|
|
(1,748
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable
|
|
|
(1,610
|
)
|
|
|
(1,128
|
)
|
|
|
1,975
|
|
Other accounts receivable
|
|
|
1,522
|
|
|
|
(397
|
)
|
|
|
(106
|
)
|
Prepaid income taxes
|
|
|
45
|
|
|
|
432
|
|
|
|
11,563
|
|
Prepaid expenses and other
|
|
|
748
|
|
|
|
352
|
|
|
|
1,548
|
|
Accounts payable
|
|
|
(57
|
)
|
|
|
(7
|
)
|
|
|
1,643
|
|
Deferred revenue, net of professional fees
|
|
|
(2,264
|
)
|
|
|
(3,938
|
)
|
|
|
(5,536
|
)
|
Accrued liabilities and other
|
|
|
(2,507
|
)
|
|
|
5
|
|
|
|
1,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operations
|
|
|
(5,088
|
)
|
|
|
(3,501
|
)
|
|
|
1,358
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,160
|
)
|
|
|
(1,509
|
)
|
|
|
(878
|
)
|
Proceeds from sale of assets
|
|
|
305
|
|
|
|
1,400
|
|
|
|
2,829
|
|
Purchases of investment securities
|
|
|
(39,656
|
)
|
|
|
(166,968
|
)
|
|
|
(404,339
|
)
|
Proceeds from sale of investment securities
|
|
|
62,883
|
|
|
|
173,430
|
|
|
|
401,714
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
22,372
|
|
|
|
6,353
|
|
|
|
(709
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments of capital lease obligations and loan
|
|
|
(4,004
|
)
|
|
|
(3,280
|
)
|
|
|
(5,859
|
)
|
Shares repurchased for treasury stock
|
|
|
(357
|
)
|
|
|
(288
|
)
|
|
|
(193
|
)
|
Proceeds from exercise of stock options
|
|
|
57
|
|
|
|
24
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(4,304
|
)
|
|
|
(3,544
|
)
|
|
|
(6,039
|
)
|
Net effect of exchange rate changes on cash and cash equivalents
|
|
|
105
|
|
|
|
(90
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
13,085
|
|
|
|
(782
|
)
|
|
|
(5,179
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
18,568
|
|
|
|
19,350
|
|
|
|
24,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
31,653
|
|
|
$
|
18,568
|
|
|
$
|
19,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid or received during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
84
|
|
|
$
|
529
|
|
|
$
|
620
|
|
Income taxes refunded
|
|
|
79
|
|
|
|
499
|
|
|
|
12,086
|
|
Income taxes paid
|
|
|
64
|
|
|
|
64
|
|
|
|
125
|
|
See Notes to Consolidated Financial Statements
31
LCA-VISION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
25,291,637
|
|
|
$
|
25
|
|
|
|
25,291,637
|
|
|
$
|
25
|
|
|
|
25,287,387
|
|
|
$
|
25
|
|
Employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
25,291,637
|
|
|
$
|
25
|
|
|
|
25,291,637
|
|
|
$
|
25
|
|
|
|
25,291,637
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock in Treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(6,433,490
|
)
|
|
$
|
(112,910
|
)
|
|
|
(6,580,272
|
)
|
|
$
|
(114,033
|
)
|
|
|
(6,668,202
|
)
|
|
$
|
(114,668
|
)
|
Shares repurchased
|
|
|
(57,661
|
)
|
|
|
(301
|
)
|
|
|
(34,817
|
)
|
|
|
(265
|
)
|
|
|
(22,055
|
)
|
|
|
(193
|
)
|
Employee stock plans
|
|
|
250,018
|
|
|
|
1,816
|
|
|
|
181,599
|
|
|
|
1,388
|
|
|
|
109,985
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(6,241,133
|
)
|
|
$
|
(111,395
|
)
|
|
|
(6,433,490
|
)
|
|
$
|
(112,910
|
)
|
|
|
(6,580,272
|
)
|
|
$
|
(114,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
$
|
177,287
|
|
|
|
|
|
|
$
|
175,610
|
|
|
|
|
|
|
$
|
174,325
|
|
Employee stock plans
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,060
|
|
|
|
|
|
|
|
1,676
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
$
|
179,543
|
|
|
|
|
|
|
$
|
177,287
|
|
|
|
|
|
|
$
|
175,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
$
|
(38,720
|
)
|
|
|
|
|
|
$
|
(31,134
|
)
|
|
|
|
|
|
$
|
(9,729
|
)
|
Net loss
|
|
|
|
|
|
|
(8,517
|
)
|
|
|
|
|
|
|
(6,198
|
)
|
|
|
|
|
|
|
(20,577
|
)
|
Treasury stock changes
|
|
|
|
|
|
|
(1,816
|
)
|
|
|
|
|
|
|
(1,388
|
)
|
|
|
|
|
|
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
$
|
(49,053
|
)
|
|
|
|
|
|
$
|
(38,720
|
)
|
|
|
|
|
|
$
|
(31,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
|
|
|
$
|
583
|
|
|
|
|
|
|
$
|
662
|
|
|
|
|
|
|
$
|
1,074
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
214
|
|
Unrealized investment (loss) gain
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
|
|
$
|
677
|
|
|
|
|
|
|
$
|
583
|
|
|
|
|
|
|
$
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Investment
|
|
|
|
|
|
$
|
19,797
|
|
|
|
|
|
|
$
|
26,265
|
|
|
|
|
|
|
$
|
31,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Business
We are a provider of fixed-site laser vision correction services at our
Lasik
Plus
®
vision centers. Our vision centers provide the staff, facilities, equipment and support
services for performing laser vision correction that employ advanced laser technologies to help correct nearsightedness, farsightedness and astigmatism. We currently use two suppliers for lasers: Abbott Medical Optics (AMO) and Alcon
Inc. (Alcon). Our vision centers are supported by independent ophthalmologists and credentialed optometrists, as well as other healthcare professionals. The ophthalmologists perform the laser vision correction procedures in our vision
centers, and either ophthalmologists or optometrists conduct pre-procedure evaluations and post-operative follow-up care in-center. Most of our patients receive a procedure called LASIK, which we began performing in the United States in 1996.
As of December 31, 2012, we operated 54 Lasik
Plus
®
vision centers in the United States. Included in the number are two vision centers licensed to ophthalmologists to operate using our trademarks. Beginning in
2011, we began offering standard cataract, premium intraocular lens (IOL) and implantable Collamer lens (ICL) services in certain of our existing markets under our new Visium Eye Institute
®
brand. Our cataract, IOL and ICL services were not significant in 2012 and we do not anticipate our cataract
services will represent a significant portion of our operations in 2013.
Use of Estimates
The preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include investment valuation, allowance for doubtful
accounts against patient receivables, insurance reserves, income taxes and enhancement accruals. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the
circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
Consolidation and
Basis of Presentation
The Consolidated Financial Statements include all of the assets, liabilities, revenues, expenses and cash flows of
entities in which we have a controlling interest. In addition, we consolidate the results of operations of professional corporations with which we contract to provide the services of ophthalmologists or optometrists at our vision centers.
Investments in joint ventures and 20% to 50% owned affiliates where we have the ability to exert significant influence have been accounted for by the equity method. Intercompany transactions and balances have been eliminated upon consolidation.
Reclassifications
We have
reclassified certain prior-period amounts in the Consolidated Statements of Operations and Comprehensive Loss to conform to current period presentation. The reclassifications were not material to the Consolidated Financial Statements.
Cash and Cash Equivalents
We consider
highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents.
Investments
Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.
Currently, we classify all securities as available-for-sale. We carry available-for-sale securities at fair value, with temporary unrealized gains and losses, net of tax, reported in accumulated other comprehensive income, a component of
stockholders investment. The amortized cost of debt securities in this category reflects amortization of premiums and accretion of discounts to maturity computed under the effective interest method. We include this amortization in the caption
Net investment income and other within the Consolidated Statements of Operations and Comprehensive Loss. We also include in net investment income realized gains and losses and declines in value determined to be other-than-temporary. We
base the cost of securities sold upon the specific identification method. We include interest and dividends on securities classified as available-for-sale in net investment income.
Fair Value Measurements
We apply fair value accounting for all financial assets and
liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, we consider the principal or most advantageous market in which we would transact and the market-based
risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk (including our own non-performance risk).
33
Patient Receivables and Allowance for Doubtful Accounts
We provide financing to some of our patients, including those who could not otherwise obtain third-party financing. The terms of the financing usually
require the patient to pay an up-front fee which is intended to cover some or all of our variable costs, and then generally we deduct the remainder automatically from the patients bank account over a period of 12 to 36 months. We have recorded
an allowance for doubtful accounts as a best estimate of the amount of probable credit losses from our patient financing program. Each month, we review and adjust the allowance based upon our own experience with patient financing. We charge off
receivables against the allowance for doubtful accounts when it is probable that a receivable will not be recovered. Our policy is to reserve for all patient receivables that remain open past their financial maturity date and to provide reserves for
patient receivables prior to the maturity date so as to bring patient receivables, net of reserves, down to the estimated net realizable value based on historical collectability rates, recent default activity and the current credit environment. Bad
debt expense was $914,000, or 0.9% of revenues for 2012, $746,000, or 0.7% of revenues for 2011, and $1.1 million, or 1.1% of revenues, for 2010. During the period ended December 31, 2012, we wrote off $1.0 million of receivables against the
allowance for doubtful accounts and recovered $127,000 in receivables previously written off. During the prior period, we wrote off $851,000 of receivables against the allowance for doubtful accounts and recovered $137,000 in receivables previously
written off.
For patients whom we internally finance, we charge interest at market rates. Finance and interest charges on patient receivables
were $820,000 in 2012, $621,000 in 2011 and $740,000 in 2010. We include these amounts in Net investment income and other within the Consolidated Statements of Operations and Comprehensive Loss.
We maintained an allowance for doubtful accounts for our other accounts receivable of $340,000 at December 31, 2012 and $298,000 at
December 31, 2011.
Property and Equipment, Depreciation and Amortization
We record our property and equipment at its original cost, net of accumulated depreciation. At the time that property or equipment is retired, sold, or otherwise disposed of, we deduct the related cost
and accumulated depreciation from the amounts reported in the Consolidated Balance Sheets and recognize any gains or losses on disposition in the Consolidated Statements of Operations and Comprehensive Loss. We expense repair and maintenance costs
as incurred. We include assets recorded under capitalized leases within property and equipment.
We compute depreciation using the
straight-line method, which recognizes the cost of the asset over its estimated useful life. We use the following estimated useful lives for computing the annual depreciation expense:
|
|
|
Fixed Asset Group
|
|
Depreciable
Lives
|
Building and building improvements
|
|
5 - 39 years
|
Furniture and fixtures
|
|
3 - 7 years
|
Medical equipment
|
|
3 - 5 years
|
Other equipment
|
|
3 - 5 years
|
We record amortization of leasehold improvements in the Consolidated Statements of Operations and Comprehensive Loss as a
component of depreciation expense using the straight-line method based on the lesser of the useful life of the improvement or the lease term, which is typically five years or less.
We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value might not be recoverable. Recoverability of long-lived assets is assessed by comparison
of the carrying amount of the asset to the estimated future undiscounted net cash flows expected to be generated by the asset or group of assets. We write down to fair value, which is generally determined from estimated discounted cash flows for
assets held for use, recorded values of property and equipment that we do not expect to recover through undiscounted future net cash flows. During 2012, we recognized fixed asset impairment charges of $617,000, primarily as a result of our decision
to close under-performing vision centers and relocate our patient communication center to our corporate headquarters. The closures of the vision centers do not qualify for classification as a discontinued operation due to continuing cash flows. We
will continue to incur cash expenditures related to these vision centers in the form of future facility lease payments and costs associated with post-operative care and post-surgical enhancements. During 2011, we recognized fixed asset impairment
charges of $104,000 for certain assets held for use in a laser vision correction center.
Accrued Enhancement Expense
We include participation in our Lasik
Plus
Advantage Plan
®
(acuity program) in the base surgical price for substantially all of our patients. Under the acuity program, if determined to be medically appropriate, we provide
post-surgical enhancements free of charge should the patient not achieve the desired visual correction during the initial procedure. Under this pricing structure, we account for the acuity program as a warranty obligation. Accordingly, we accrue the
costs expected to be incurred to satisfy the obligation as a liability and direct cost of service at the point of sale given our ability to estimate reasonably such costs based on historical trends and the satisfaction of all other revenue
recognition criteria.
34
We record a post-surgical enhancement accrual based on our best estimate of the number and associated cost
of the procedures to be performed. Each month, we review the enhancement accrual and consider factors such as procedure cost and historical procedure volume when determining the appropriateness of the recorded balance. As of December 31, 2012
and 2011, we maintained an enhancement accrual of $2.8 million and $3.4 million, respectively. The long-term portion of the enhancement accrual of $1.8 million and $2.1 million as of December 31, 2012 and 2011, respectively, is recorded as a
component of Other long-term liabilities on the Consolidated Balance Sheets.
Insurance Reserves
We maintain a captive insurance company to provide professional liability insurance coverage for claims brought against us and our optometrists after
December 17, 2002. In addition, our captive insurance companys charter allows it to provide professional liability insurance for our ophthalmologists, none of whom are currently insured by the captive. We use the captive insurance company
for both primary insurance and excess liability coverage. A number of claims are now pending with our captive insurance company. We consolidate the financial statements of the captive insurance company with our financial statements because it is a
wholly-owned enterprise. As of December 31, 2012 and 2011, we maintained insurance reserves of $6.6 million and $7.2 million, respectively, which represented primarily an actuarially determined estimate of future costs associated with claims
filed as well as claims incurred but not yet reported. We recorded $871,000 and $951,000 of the total insurance reserve as a current liability in Accrued liabilities and other at December 31, 2012 and 2011, respectively. Our
actuaries determine loss reserves by comparing our historical claim experience to comparable insurance industry experience. Since the inception of the captive insurance company in 2002, it has disbursed total claims and legal expenses of
approximately $7.7 million.
Income Taxes
We are subject to income taxes in the United States and Canada. Significant judgment is required in determining our provision for income taxes and the related assets and liabilities. The provision
for income taxes includes income taxes paid, currently payable or receivable, and those deferred. We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities, and
we measure them using enacted tax rates and laws that are expected to be in effect when the differences reverse. We recognize the effect on deferred taxes of changes in tax rates in the period in which the enactment date changes. We
establish valuation allowances when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized.
In the ordinary course of business, there are certain transactions and calculations where the ultimate tax determination is uncertain. The
evaluation of a tax position in accordance with U.S. GAAP is a two-step process. The first step is a recognition process to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is assessed to
determine the cost or benefit to be recognized in the financial statements.
Per Share Data
Basic per share data is income applicable to common shares divided by the weighted average common shares outstanding. Diluted per share data is income
applicable to common shares divided by the weighted average common shares outstanding plus shares issuable upon the vesting of outstanding restricted stock units and the exercise of in-the-money stock options.
The following is a reconciliation of basic and diluted loss per share (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Basic Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,517
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(20,577
|
)
|
Weighted average common shares outstanding
|
|
|
18,982
|
|
|
|
18,811
|
|
|
|
18,680
|
|
Basic loss per share
|
|
$
|
(0.45
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(1.10
|
)
|
Diluted Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,517
|
)
|
|
$
|
(6,198
|
)
|
|
$
|
(20,577
|
)
|
Weighted average common shares outstanding
|
|
|
18,982
|
|
|
|
18,811
|
|
|
|
18,680
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and potential dilutive shares
|
|
|
18,982
|
|
|
|
18,811
|
|
|
|
18,680
|
|
Diluted loss per share
|
|
$
|
(0.45
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(1.10
|
)
|
35
For 2012, 2011 and 2010, we excluded all outstanding stock options and restricted stock awards from the
computation of our diluted earnings per share because the effect of these share-based awards was antidilutive due to our net losses.
Revenue Recognition
We recognize
revenues as services are performed and persuasive evidence of an arrangement for payment exists. Additionally, we recognize revenue when the price is fixed and determinable and collectability is reasonably assured. We deferred revenues associated
with separately priced acuity programs and recognize it over the period in which future costs of performing the post-surgical enhancement procedures are expected to be incurred as we have sufficient experience to support that costs associated with
future enhancements will be incurred on other than a straight-line basis. We report all revenues net of tax assessed by applicable governmental authorities.
Marketing and Advertising Expenditures
We expense marketing and advertising costs as
incurred, except for the costs associated with direct mail. Direct mail costs include printing mailers for future use, purchasing mailing lists of potential patients and postage cost. We expense printing and postage costs as the items are mailed.
Stock-Based Compensation
We
account for stock-based payment transactions in which we receive employee services in exchange for (a) our stock or (b) liabilities that are based on the fair value of our stock or that may be settled by the issuance of our stock.
Stock-based compensation cost for restricted stock units (RSUs) are measured based on the closing fair market value of our common stock on the date of grant. Stock-based compensation cost for stock options is estimated at the grant date
based on each options fair-value as calculated by the Black-Scholes option-pricing model. We recognize stock-based compensation cost as expense for these awards ratably on a straight-line basis over the requisite service period. We also grant
awards that are tied to the achievement of certain financial targets and stock-performance criteria. These awards are granted annually and cover a three-year performance cycle. Performance measures used to determine the actual number of shares
issuable upon vesting include a weighting of revenue and operating income targets and our total shareholder return (TSR) performance. TSR is considered a market condition while the revenue and operating income targets are considered
a performance condition under applicable U.S. GAAP. The fair value of the revenue and operating income target portion of the performance share awards is equal to the fair market value of our common stock on the date of the
grant. Compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. The fair value of the TSR portion of the performance share awards is calculated using a Monte
Carlo simulation valuation model. Compensation cost is recognized over the requisite service period regardless of whether the market condition is satisfied. We will recognize a benefit from stock-based compensation in equity if an incremental tax
benefit is realized by following the ordering provisions of the tax law. Further information regarding stock-based compensation can be found in Note 9, Employee Benefits.
Geographic Information
We have no operations or assets in any countries other than the
U.S. and Canada. No single customer represented more than 10% of revenues in 2012, 2011, or 2010. Information about our domestic and international operations is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from External Customers
|
|
|
Net Assets
|
|
|
Property and Equipment
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
101,493
|
|
|
$
|
102,983
|
|
|
$
|
99,825
|
|
|
$
|
15,143
|
|
|
$
|
21,766
|
|
|
$
|
6,380
|
|
|
$
|
10,637
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,654
|
|
|
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,493
|
|
|
$
|
102,983
|
|
|
$
|
99,825
|
|
|
$
|
19,797
|
|
|
$
|
26,265
|
|
|
$
|
6,380
|
|
|
$
|
10,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent Events
We evaluated all events or transactions that occurred after December 31, 2012 through the date we issued these Consolidated Financial Statements.
2. Stockholders Investment
Capital Stock
We have
27.5 million authorized shares of common stock with $0.001 per share par value and 5.0 million authorized shares of preferred stock. The holders of the common stock may cast one vote for each share held of record on all matters submitted
to a vote of stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably such dividends as may be declared from time to time by our Board of Directors out of
funds legally available for that purpose. In the event of liquidation, dissolution or winding up, the holders of common stock share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding.
36
Share Repurchase Programs
On August 21, 2007, our Board of Directors authorized a share repurchase plan under which we are authorized to purchase up to an additional $50.0 million of our common stock. Through
December 31, 2008, we repurchased 588,408 shares of our common stock under this program at an average price of $16.99 per share, for a total cost of approximately $10.0 million. We have not purchased any shares of our common stock under this
program since 2008. At December 31, 2012, we held 6.2 million shares of our common stock in treasury.
Dividend
No dividends have been paid since 2008.
3. Investments
The following table summarizes unrealized gains and losses related to our investments designated as available-for-sale (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Certificates of deposit
|
|
$
|
2,804
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
2,804
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
Adjusted
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Corporate obligations
|
|
$
|
11,260
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
11,259
|
|
U.S. Government notes
|
|
|
14,049
|
|
|
|
7
|
|
|
|
(4
|
)
|
|
|
14,052
|
|
Auction rate municipal securities
|
|
|
893
|
|
|
|
9
|
|
|
|
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
26,202
|
|
|
$
|
16
|
|
|
$
|
(5
|
)
|
|
$
|
26,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents gross unrealized losses and fair values for those investments that were in an unrealized
loss position aggregated by investment category and the length of time that individual securities have been in a continuous loss position (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
As of December 31, 2011
|
|
|
|
Less than 12 Months
|
|
|
Less than 12 Months
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Corporate obligations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,810
|
|
|
$
|
(1
|
)
|
U.S. Government notes
|
|
|
|
|
|
|
|
|
|
|
6,758
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,568
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no investments that were in an unrealized loss position for greater than 12 months at December 31, 2012
or 2011.
We realized gains of $3,000 and losses of $60,000 on sales of our marketable securities during the year ended December 31,
2012. We had realized gains of $52,000 and no losses and gains of $1.1 million and losses of $51,000 on the sale of marketable securities during the years ended December 31, 2011 and 2010, respectively.
We recognized $11,000 of other-than-temporary impairments to certain of our auction rate securities in 2012, $10,000 in 2011 and $86,000 in 2010. When
evaluating investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer of the investment securities and any changes
thereto, and our intent to sell, or whether it is more-likely-than-not we would be required to sell the investment before recovery of the investments amortized cost basis.
37
The net carrying value and estimated fair value of debt and equity securities available for sale at
December 31, 2012, by contractual maturity, are shown below (dollars in thousands). Expected maturities may differ from contractual maturities because the issuers of the securities may have the right or obligation to prepay obligations without
prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
Due in one year or less
|
|
$
|
2,804
|
|
|
$
|
2,804
|
|
Due after one year through three years
|
|
|
|
|
|
|
|
|
Due after three years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
2,804
|
|
|
$
|
2,804
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Securities
During 2012 we redeemed our remaining auction rate securities with par value of $1.1 million at 75% of par value. At December 31, 2011, we held at par value $1.1 million of various auction rate
securities. The assets underlying the auction rate instruments were primarily municipal bonds. In 2011, issuers called at par $25,000 of the related securities, and we redeemed an additional $1.1 million at 81% of original par value. We no longer
hold any auction rate securities.
4. Debt
In April 2008, we entered into a bank loan agreement for $19.2 million to finance medical equipment. The loan agreement provided for
repayment in equal monthly installments over a five-year period at a fixed interest rate of 4.96%. The loan agreement contained no financial covenants. The bank loan was secured by certain medical equipment. Our outstanding debt was $4.0 million as
of December 31, 2011, of which $3.0 million was due within 12 months. In June 2012, we paid our outstanding bank loan in full, reducing our total debt to zero.
5. Fair Value Measurements
U.S. GAAP establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.
Level 1:
|
Quoted prices for identical assets or liabilities in active markets at the measurement date
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data at the measurement date
|
Level 3:
|
Unobservable inputs reflecting managements best estimate of what market participants would use in pricing the asset or liability at the measurement date
|
When applying the fair value principles in valuation of assets and liabilities, we are required to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these
instruments.
The following table summarizes fair value measurements by level at December 31, 2012 and 2011 for assets and liabilities
measured at fair value on a recurring basis (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,804
|
|
|
$
|
25,311
|
|
|
$
|
|
|
|
$
|
902
|
|
|
$
|
2,804
|
|
|
$
|
26,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,804
|
|
|
$
|
25,311
|
|
|
$
|
|
|
|
$
|
902
|
|
|
$
|
2,804
|
|
|
$
|
26,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The valuation technique used to measure fair value of certificates of deposit was based on quoted market prices or
corroborated by observable market data.
The fair values of some investment securities previously held within our investment portfolio were
based on quoted market prices from various stock and bond exchanges. Certain of our debt securities were classified at fair value utilizing Level 2 inputs. For these securities, fair value was measured using observable market data that includes
dealer quotes, live trading levels, trade execution data, credit information and the bonds terms and conditions. The fair values of our auction rate investment instruments were classified in Level 3 because they were valued using a trinomial
discounted cash flow model.
38
There were no transfers between Level 1 and Level 2 measurements in 2012 or 2011. The following table sets
forth a reconciliation of beginning and ending balances for each major category for assets measured at fair value using significant unobservable inputs (Level 3) during 2012 and 2011 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Description
|
|
2012
|
|
|
2011
|
|
Balance as of January 1
|
|
$
|
902
|
|
|
$
|
951
|
|
Assets acquired
|
|
|
|
|
|
|
|
|
Assets sold or redeemed
|
|
|
(822
|
)
|
|
|
(25
|
)
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
Losses included in earnings
|
|
|
(71
|
)
|
|
|
(6
|
)
|
Losses included in other comprehensive loss
|
|
|
(9
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
|
|
|
$
|
902
|
|
|
|
|
|
|
|
|
|
|
6. Assets Held for Sale
We had assets held for sale of $24,000 and $46,000 at December 31, 2012 and 2011, respectively, comprised of excimer and
femtosecond lasers. Assets held for sale are recorded as a component of Prepaid expenses and other on the Consolidated Balance Sheets. During 2012, we sold some of our excimer and femtosecond lasers held for sale with a combined net book
value of $46,000 for total cash proceeds of $90,000, resulting in a gain of $44,000 before tax. During 2011, we sold some of our excimer and femtosecond lasers held for sale with a combined net book value of $416,000 for total cash proceeds of
approximately $917,000, resulting in a gain of approximately $501,000, before tax. We measured assets held for sale at December 31, 2012 and 2011 at the lower of cost or fair value less cost to sell. We based the fair value and cost to sell
estimates on corroborative market data, which is a Level 2 input under U.S. GAAP.
7. Income Taxes
The following table presents the components of income tax (benefit) expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(77
|
)
|
|
$
|
26
|
|
|
$
|
(463
|
)
|
U.S. State and local
|
|
|
(61
|
)
|
|
|
104
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(138
|
)
|
|
|
130
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
418
|
|
U.S. State and local
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(138
|
)
|
|
$
|
130
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
The following table presents loss before income taxes (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
(8,706
|
)
|
|
$
|
(6,092
|
)
|
|
$
|
(20,546
|
)
|
Canada
|
|
|
51
|
|
|
|
24
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8,655
|
)
|
|
$
|
(6,068
|
)
|
|
$
|
(20,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the U.S. statutory federal income tax rate and the tax (benefit) expense shown in our
Consolidated Statements of Operations and Comprehensive Loss (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax at statutory U.S. federal income tax rate of 35%
|
|
$
|
(3,029
|
)
|
|
$
|
(2,124
|
)
|
|
$
|
(7,187
|
)
|
State and local income taxes, net of federal benefit
|
|
|
(293
|
)
|
|
|
(148
|
)
|
|
|
(699
|
)
|
Permanent differences
|
|
|
33
|
|
|
|
171
|
|
|
|
19
|
|
Resolution and reevaluation of tax positions
|
|
|
(102
|
)
|
|
|
75
|
|
|
|
12
|
|
Other
|
|
|
281
|
|
|
|
(131
|
)
|
|
|
124
|
|
Valuation allowance
|
|
|
2,972
|
|
|
|
2,287
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(138
|
)
|
|
$
|
130
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have made no provision for U.S. income taxes on undistributed earnings of approximately $4.7 million from our Canadian
subsidiary because it is our intention to reinvest those earnings in that operation. If those earnings are distributed in the form of dividends, we may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax
credits. The amount of additional tax that might be payable upon repatriation of these foreign earnings is approximately $326,000.
U.S. GAAP
requires a company to establish a valuation allowance for deferred tax assets when it is more-likely-than-not that the deferred tax asset will not be realized. Deferred tax assets may be realized through future reversals of existing taxable
temporary differences, future taxable income, taxable income in prior carryback year(s) if carryback is permitted, and tax planning strategies.
In 2009, we considered all positive and negative evidence in determining whether or not the net deferred tax assets were more-likely-than-not to be
realized, including the current economic conditions and our 2010 operating projections completed during 2009. After considering all of the evidence, we concluded that reliance on future projections of income was no longer sufficient to support
realization of our deferred tax assets. Accordingly, in 2009 we established a valuation allowance against all of our net deferred tax assets in the amount of $12.2 million as we believed it was not more-likely-than-not that our net deferred tax
assets would be utilized. After undertaking a similar analysis again in 2010, 2011 and 2012, we still believe that we cannot support the realization of our deferred tax assets.
As of December 31, 2012, we had net operating loss carryforwards for federal and state income taxes of approximately $39.3 million and $68.3 million, respectively, which will be available to offset
future taxable income. Approximately $8.6 million of state net operating loss is subject to an annual IRC Section 382 limitation of $5.3 million. If not used, these carryforwards will expire between 2013 and 2032. To the extent net operating
loss carryforwards, when realized, relate to non-qualified stock option deductions, the resulting benefits will be credited to stockholders investment.
40
Deferred taxes arise because of temporary differences in the book and tax basis of certain assets and
liabilities. The following table shows the significant components of our deferred taxes (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
336
|
|
|
$
|
1,217
|
|
Allowance for doubtful accounts
|
|
|
775
|
|
|
|
765
|
|
Accrued enhancement expense
|
|
|
1,101
|
|
|
|
1,349
|
|
Insurance reserves
|
|
|
1,159
|
|
|
|
1,281
|
|
Deferred lease credits
|
|
|
319
|
|
|
|
441
|
|
Share-based compensation
|
|
|
986
|
|
|
|
929
|
|
Vendor rebates
|
|
|
662
|
|
|
|
1,192
|
|
Investments
|
|
|
|
|
|
|
72
|
|
Property and equipment
|
|
|
1,549
|
|
|
|
778
|
|
Net operating and capital loss carryforward
|
|
|
17,563
|
|
|
|
13,749
|
|
Other
|
|
|
2,596
|
|
|
|
2,245
|
|
Valuation allowance
|
|
|
(26,377
|
)
|
|
|
(23,405
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
669
|
|
|
$
|
613
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred lease incentives
|
|
$
|
566
|
|
|
$
|
486
|
|
Prepaid service
|
|
|
103
|
|
|
|
124
|
|
Other
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
669
|
|
|
$
|
613
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrecognized tax benefits were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Balance, beginning of year
|
|
$
|
614
|
|
|
$
|
539
|
|
Additions based on tax positions related to the current year
|
|
|
52
|
|
|
|
50
|
|
Additions for tax positions of prior years
|
|
|
1
|
|
|
|
49
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
Reductions due to statute expiration
|
|
|
(155
|
)
|
|
|
(24
|
)
|
Settlements
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
508
|
|
|
$
|
614
|
|
|
|
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $380,000. It is
reasonably possible that the amount of the unrecognized tax benefits may increase or decrease within the next 12 months. However, we do not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the
Consolidated Financial Statements. We record unrecognized tax benefits as a component of Accrued liabilities and other in our Consolidated Balance Sheets.
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Consolidated Statements of Operations. During the year ended December 31, 2012, we
recognized tax expense of approximately $24,000 in interest and penalties, offset by $105,000 benefit related to interest expense previously recognized on unrecognized tax benefits whose statute expired in 2012. We have accrued approximately $90,000
and $171,000 in interest and penalties related to unrecognized tax benefits as of December 31, 2012 and 2011, respectively, recorded as a component of Accrued liabilities and other in our Consolidated Balance Sheets.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Canada. We are subject to audit by taxing authorities
for fiscal years ending after 2010. Our federal and state income tax return filings generally are subject to a three-year statute of limitations from date of filing. During 2012, the Internal Revenue Service began, and completed, an audit for the
2010 tax year without audit adjustments.
41
8. Leasing Arrangements
We lease office space for our vision centers under lease arrangements that qualify as operating leases. For leases that contain
pre-determined fixed escalations of the minimum rentals and/or rent abatements subsequent to taking possession of the leased property, we recognize the related rent expense on a straight-line basis and record the difference between the recognized
rental expense and amounts payable under the leases as deferred lease credits. We used capitalized leases to finance certain excimer lasers used in the laser vision correction procedures. We included capital lease assets in property and equipment.
The following table displays our aggregate minimal rental commitments, net of guaranteed sub-lease income under noncancellable leases for the
periods shown (dollars in thousands):
|
|
|
|
|
Year
|
|
Operating
Lease
Obligations
|
|
2013
|
|
$
|
8,097
|
|
2014
|
|
|
5,127
|
|
2015
|
|
|
3,799
|
|
2016
|
|
|
3,225
|
|
2017
|
|
|
2,257
|
|
Beyond 2017
|
|
|
1,261
|
|
|
|
|
|
|
Total minimum rental commitment
|
|
$
|
23,766
|
|
|
|
|
|
|
Total rent expense under operating leases amounted to $6.3 million in 2012, $6.7 million in 2011 and $8.1 million in
2010.
In March and April 2009, we entered into five-year lease agreements with Alcon and AMO, respectively, for new excimer lasers which
allowed us to standardize our excimer treatment platforms. As part of the transactions, we disposed of our Bausch & Lomb lasers and related capital lease obligations. We received cash payments from the lessors and have deferred these
amounts and are recognizing them ratably over the lease terms. We include the unrecognized portion in Accrued liabilities and other for the current portion and in Deferred license fees for the long-term portion in our
Consolidated Balance Sheets at December 31, 2012 and 2011. The AMO laser lease qualified as a capital lease, and the Alcon laser lease qualified as an operating lease. However, at December 31, 2012, we did not have any obligations under
the capital lease arrangement with AMO.
9. Employee Benefits
Savings Plan
We
sponsor a savings plan under Internal Revenue Code Section 401(k) to provide an opportunity for eligible employees to save for retirement on a tax-deferred basis. Under this plan, we may make discretionary contributions to the
participants accounts. We have not made any employer contributions since 2008.
Stock Incentive Plans
We have five stock incentive plans, the 1995 Long-Term Stock Incentive Plan (1995 Plan), the 1998 Long-Term Stock Incentive Plan (1998
Plan), the 2001 Long-Term Stock Incentive Plan (2001 Plan), the 2006 Stock Incentive Plan (2006 Plan) and the 2011 Stock Incentive Plan (2011 Plan). With the adoption of the 2011 Plan, we froze all prior
plans, and we have not made any new grants from prior plans. Under the stock incentive plans, at December 31, 2012, we reserved approximately 855,000 shares of our common stock for issuance upon the exercise of outstanding stock options and the
vesting of outstanding restricted stock units, including 17,000 shares under the 1995 Plan, 102,000 shares under the 1998 Plan, 54,000 shares under the 2001 Plan, 341,000 shares under the 2006 Plan and 342,000 shares under the 2011 Plan. At
December 31, 2012, a total of 1.2 million shares were available for future awards under the 2011 Plan. The Compensation Committee of the Board of Directors administers all of our stock incentive plans.
The 2011 Plan permits us to issue incentive or non-qualified stock options to purchase shares of common stock, stock appreciation rights, restricted and
unrestricted stock awards, performance awards, and cash awards to employees and non-employee directors.
42
The components of our pre-tax stock-based compensation expense, net of forfeitures, and associated income
tax benefits are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Stock options
|
|
$
|
78
|
|
|
$
|
71
|
|
|
$
|
36
|
|
Restricted stock
|
|
|
1,982
|
|
|
|
1,605
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,060
|
|
|
$
|
1,676
|
|
|
$
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
801
|
|
|
$
|
650
|
|
|
$
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Our stock incentive plans permit certain employees to receive grants of fixed-price stock options. The option price is equal to the fair value of a share of the underlying stock at the date of grant.
Option terms are generally 10 years, with options generally becoming exercisable between one and five years from the date of grant.
We
estimated the fair value of each stock option on the date of the grant using a Black-Scholes option pricing model that used assumptions noted below. We based expected volatility on a blend of implied and historical volatility of our common stock. We
used historical data on exercises of stock options and other factors to estimate the expected term of the share-based payments granted. We based the risk-free rate on the U.S. Treasury yield curve in effect at the date of grant. We based the
expected life of the options on historical data and it is not necessarily indicative of exercise patterns that may occur. The dividend yield reflected the assumption that the current dividend payout in effect at the time of grant.
No stock options were issued in 2012, 2011 or 2010.
The following table summarizes the status of options granted under the stock incentive plans:
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at January 1, 2010
|
|
|
349,726
|
|
|
$
|
19.64
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,750
|
)
|
|
|
3.55
|
|
Cancelled/forfeited
|
|
|
(88,260
|
)
|
|
|
25.08
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
257,716
|
|
|
|
18.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,375
|
)
|
|
|
3.63
|
|
Cancelled/forfeited
|
|
|
(7,629
|
)
|
|
|
22.43
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
243,712
|
|
|
|
18.25
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(11,520
|
)
|
|
|
4.92
|
|
Cancelled/forfeited
|
|
|
(19,584
|
)
|
|
|
19.11
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
212,608
|
|
|
|
18.89
|
|
Options exercisable, December 31, 2012
|
|
|
208,932
|
|
|
|
18.97
|
|
Options expected to vest, December 31, 2012
|
|
|
212,595
|
|
|
|
18.89
|
|
The total intrinsic value (market value on date of exercise less exercise price) of options exercised during 2012, 2011
and 2010 was approximately $30,000, $24,000 and $17,000, respectively. As of December 31, 2012, outstanding stock options, options vested and expected to vest, and options exercisable had no intrinsic value because the exercise price was
greater than the stock price.
We received approximately $57,000 for 2012, $24,000 for 2011 and $13,000 for 2010 in cash from option exercises
under all share-based payment arrangements. We recognized actual tax expense for the tax deductions from option exercises under all share-based payment arrangements for 2012, 2011 and 2010 of approximately $44,000, $81,000 and $153,000,
respectively. U.S. GAAP requires the cash flows resulting from income tax deductions in excess of compensation costs to be classified as financing cash flows.
43
At December 31, 2012, there was $6,000 of total unrecognized, pre-tax compensation cost related to
non-vested stock options. We expect to recognize this cost over a weighted-average period of approximately 0.17 years.
The following table
summarizes information about the stock options granted under the stock incentive plans that were outstanding at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
Range of exercise prices
|
|
|
Number
outstanding as of
December 31,
2012
|
|
|
Weighted-
average
remaining
contractual
term
|
|
|
Weighted-
average
exercise price
|
|
|
Number
exercisable as of
December 31,
2012
|
|
|
Weighted-
average
exercise price
|
|
|
|
$
|
5.92
|
|
|
$
|
10.65
|
|
|
|
23,820
|
|
|
|
0.54
|
|
|
$
|
7.41
|
|
|
|
23,820
|
|
|
$
|
7.41
|
|
|
|
|
11.84
|
|
|
|
11.84
|
|
|
|
18,750
|
|
|
|
0.05
|
|
|
|
11.84
|
|
|
|
18,750
|
|
|
|
11.84
|
|
|
|
|
12.19
|
|
|
|
12.19
|
|
|
|
29,401
|
|
|
|
0.93
|
|
|
|
12.19
|
|
|
|
29,401
|
|
|
|
12.19
|
|
|
|
|
12.94
|
|
|
|
12.94
|
|
|
|
21,663
|
|
|
|
0.25
|
|
|
|
12.94
|
|
|
|
21,663
|
|
|
|
12.94
|
|
|
|
|
14.28
|
|
|
|
14.31
|
|
|
|
25,881
|
|
|
|
4.15
|
|
|
|
14.29
|
|
|
|
22,205
|
|
|
|
14.29
|
|
|
|
|
17.27
|
|
|
|
22.81
|
|
|
|
19,251
|
|
|
|
1.95
|
|
|
|
21.55
|
|
|
|
19,251
|
|
|
|
21.55
|
|
|
|
|
27.05
|
|
|
|
27.05
|
|
|
|
55,508
|
|
|
|
2.08
|
|
|
|
27.05
|
|
|
|
55,508
|
|
|
|
27.05
|
|
|
|
|
28.59
|
|
|
|
37.25
|
|
|
|
8,334
|
|
|
|
2.51
|
|
|
|
33.79
|
|
|
|
8,334
|
|
|
|
33.79
|
|
|
|
|
37.72
|
|
|
|
37.72
|
|
|
|
5,000
|
|
|
|
2.72
|
|
|
|
37.72
|
|
|
|
5,000
|
|
|
|
37.72
|
|
|
|
|
44.60
|
|
|
|
44.60
|
|
|
|
5,000
|
|
|
|
2.56
|
|
|
|
44.60
|
|
|
|
5,000
|
|
|
|
44.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
$
|
5.92
|
|
|
$
|
44.60
|
|
|
|
212,608
|
|
|
|
1.67
|
|
|
$
|
18.89
|
|
|
|
208,932
|
|
|
$
|
18.97
|
|
The weighted-average fair value of options granted was $6.43 per share during 2009.
Restricted Stock
Our stock incentive
plans permit certain employees and non-employee directors to be granted restricted share unit awards in common stock. We value awards of restricted share units by reference to shares of common stock. Awards entitle a participant to receive, upon the
settlement of the unit, one share of common stock for each unit. The awards vest annually, typically over a three year period from the date of the award, and do not have voting rights. Our restricted stock unit awards include both time-based awards
that vest ratably over three years and restricted stock units that are tied to the achievement of certain financial targets and stock performance criteria and cliff-vest in three years. The financial targets include revenue and operating income
measurements. Total stockholder return is considered a market condition and the fair value of those awards was calculated using a Monte Carlo simulation valuation model.
We granted 414,076 restricted stock awards to employees and non-employee directors during 2012, of which 192,320 related to performance-based restricted stock units (PRSUs). We did not grant
any restricted stock awards prior to January 1, 2006. We expense the fair value of the time-based awards at the grant date over the applicable vesting periods. We recognize stock-based compensation associated with all non-market-condition
PRSUs, if it is probable that the performance condition will be satisfied. For market-condition PRSUs, we recognize expense whether the market condition is satisfied or not. We recognize the stock-based compensation expense for PRSUs over the
requisite service period for each vesting tranche. Actual payment under the PRSUs granted in 2012 were dependent upon achievement of certain financial targets and total stockholder return goal. The financial targets were not achieved at
December 31, 2012. The total stockholder return goal is a two-year measurement which will not be determined until the beginning of 2014. Actual payment under the PRSUs granted in 2011 was dependent upon achievement of various financial targets
and total stockholder return goals. Some of the various financial targets were achieved at December 31, 2011. The total stockholder return goal was not met. Actual payment under the PRSUs granted in 2010 were dependent upon achievement of
various financial targets which were achieved at December 31, 2010.
44
The following table summarizes the restricted stock award activity for the years ended December 31,
2012, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Number of
Share Unit
Awards
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding at January 1, 2010
|
|
|
226,703
|
|
|
$
|
6.40
|
|
Granted
|
|
|
411,130
|
|
|
|
8.60
|
|
Released
|
|
|
(110,485
|
)
|
|
|
9.31
|
|
Forfeited
|
|
|
(73,773
|
)
|
|
|
6.49
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
453,575
|
|
|
|
7.67
|
|
Granted
|
|
|
334,485
|
|
|
|
5.73
|
|
Released
|
|
|
(181,599
|
)
|
|
|
6.51
|
|
Forfeited
|
|
|
(54,487
|
)
|
|
|
7.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
551,974
|
|
|
|
6.90
|
|
Granted
|
|
|
414,076
|
|
|
|
6.32
|
|
Released
|
|
|
(238,498
|
)
|
|
|
6.61
|
|
Forfeited
|
|
|
(96,085
|
)
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
631,467
|
|
|
|
6.70
|
|
As of December 31, 2012, there was $1.5 million of total unrecognized pre-tax compensation cost related to
non-vested restricted stock. We expect this cost to be recognized over a weighted-average period of approximately 1.42 years. The aggregate intrinsic value of RSUs and PRSUs outstanding at December 31, 2012 was $1.8 million.
10. Restructuring Charges
2012 Restructuring Plan
In 2012, we announced a restructuring plan to close vision centers, reduce costs and increase operational efficiencies. As a result, we incurred
restructuring charges totaling $1.1 million for 2012, which included $327,000 of contract termination costs and vision center closing costs and $803,000 of employee separation benefits.
2011 Restructuring Plan
Restructuring charges in 2011 were $36,000, comprised primarily of
adjustments to previous estimates for laser contract termination costs for previously closed vision centers, and additional severance costs. The restructuring charges in 2011 were principally the result of adjustments to previous estimates for laser
contract termination costs for previously closed vision centers, and additional severance costs.
2010 Restructuring Plan
In 2010, we announced a restructuring plan to close vision centers, reduce costs and increase operational efficiencies. As a result, we incurred
restructuring charges totaling $3.8 million for 2010, which included $3.6 million of contract termination costs and vision center closing costs and $195,000 of employee separation benefits.
Under all restructuring plans, the fair value measurements utilized internal discounted cash flow analysis in determining fair value, which is a Level 3 input under U.S. GAAP.
45
The following table summarizes the restructuring liability activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation
|
|
|
Contract
Termination
|
|
|
|
|
|
|
Employees
|
|
|
Dollars
|
|
|
Costs
|
|
|
Total
|
|
Balance at January 1, 2010
|
|
|
|
|
|
$
|
237
|
|
|
$
|
1,092
|
|
|
$
|
1,329
|
|
Liabilities recognized
|
|
|
30
|
|
|
|
195
|
|
|
|
3,595
|
|
|
|
3,790
|
|
Utilized
|
|
|
|
|
|
|
(325
|
)
|
|
|
(1,046
|
)
|
|
|
(1,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
|
|
|
|
107
|
|
|
|
3,641
|
|
|
|
3,748
|
|
Liabilities recognized
|
|
|
2
|
|
|
|
26
|
|
|
|
10
|
|
|
|
36
|
|
Utilized
|
|
|
|
|
|
|
(113
|
)
|
|
|
(1,353
|
)
|
|
|
(1,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
|
|
|
|
20
|
|
|
|
2,298
|
|
|
|
2,318
|
|
Liabilities recognized
|
|
|
14
|
|
|
|
803
|
|
|
|
327
|
|
|
|
1,130
|
|
Utilized
|
|
|
|
|
|
|
(219
|
)
|
|
|
(1,100
|
)
|
|
|
(1,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
|
|
|
$
|
604
|
|
|
$
|
1,525
|
|
|
$
|
2,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012 and 2011, we included current restructuring reserves of $1.8 million and $1.3 million,
respectively, in Accrued liabilities and other in the Consolidated Balance Sheets. Long-term restructuring reserves, comprised of contract termination costs, were $327,000 and $1.0 million at December 31, 2012 and 2011,
respectively, and were included in Other long-term liabilities.
11. Commitments and Contingencies
Our business results in a number of medical malpractice lawsuits. Claims reported to us on or prior to December 17, 2002 were
generally covered by external insurance policies and to date have not had a material financial impact on our business other than the cost of insurance and our deductibles under those policies. Effective in December 2002, we established a captive
insurance company to provide coverage for claims brought against us after December 17, 2002. We use the captive insurance company for both primary insurance and excess liability coverage. A number of claims are now pending with our captive
insurance company. Since the inception of the captive insurance company in 2002, total claims and expense payments of approximately $7.7 million have been disbursed.
Our actuaries determine our loss reserves based on our historical claim experience, comparable industry experience and recent trends that would impact the ultimate settlement of claims. We believe that
the recorded loss reserves are reasonable based on this analysis. However, due to the uncertainties inherent in the determination of these liabilities, the ultimate settlement of claims incurred through December 31, 2012 could differ from the
amounts recorded. We record any adjustment to these estimates in the period determined.
We maintained insurance reserves of $6.6 million and
$7.2 million at December 31, 2012 and 2011, respectively, of which $871,000 and $951,000 have been classified as current within the caption Accrued liabilities and other in the Consolidated Balance Sheets. Although our insurance
reserve reflects our best estimate of the amount of probable loss, we believe the range of loss that is reasonably possible to have been incurred to be approximately $5.1 million to $13.2 million at December 31, 2012.
In addition to the above, we are periodically subject to various other claims and lawsuits. We believe that none of these other claims or lawsuits to
which we are currently subject, individually or in the aggregate, will have a material adverse affect on our business, financial condition, results of operations and cash flows.
46
12. Additional Financial Information
The tables below provide additional financial information related to our Consolidated Financial Statements (all dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
Balance Sheet Information
|
|
2012
|
|
|
2011
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
354
|
|
|
$
|
354
|
|
Building and improvements
|
|
|
5,906
|
|
|
|
5,815
|
|
Leasehold improvements
|
|
|
14,504
|
|
|
|
17,283
|
|
Furniture and fixtures
|
|
|
4,008
|
|
|
|
4,114
|
|
Equipment
|
|
|
40,173
|
|
|
|
42,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,945
|
|
|
|
70,435
|
|
Accumulated depreciation
|
|
|
(58,584
|
)
|
|
|
(60,123
|
)
|
Construction in progress
|
|
|
19
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,380
|
|
|
$
|
10,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accrued liabilities and other
|
|
|
|
|
|
|
|
|
Accrued enhancement expensecurrent
|
|
$
|
1,076
|
|
|
$
|
1,343
|
|
Accrued payroll and related benefits
|
|
|
1,846
|
|
|
|
2,472
|
|
Restructuring reservecurrent
|
|
|
1,802
|
|
|
|
1,297
|
|
Deferred license fees
|
|
|
1,362
|
|
|
|
1,362
|
|
Marketing accrual
|
|
|
2,063
|
|
|
|
2,102
|
|
Miscellaneous and other expenses accrued at year-end
|
|
|
2,911
|
|
|
|
3,599
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,060
|
|
|
$
|
12,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
677
|
|
|
$
|
572
|
|
Unrealized investment gain, net of tax
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
677
|
|
|
$
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
Income Statement Information
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
The components of net investment income and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
964
|
|
|
$
|
765
|
|
|
$
|
1,066
|
|
Interest expense
|
|
|
(240
|
)
|
|
|
(378
|
)
|
|
|
(601
|
)
|
Other-than-temporary impairment on securities
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
(86
|
)
|
Realized gains on investments
|
|
|
3
|
|
|
|
52
|
|
|
|
1,080
|
|
Realized losses on investments
|
|
|
(60
|
)
|
|
|
|
|
|
|
(51
|
)
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
41
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income and other
|
|
$
|
656
|
|
|
$
|
470
|
|
|
$
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
13. Quarterly Financial Data (unaudited)
Financial results for interim periods do not necessarily indicate trends for any 12-month period. Quarterly results can be affected by
the number of procedures performed and the timing of certain expense items (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Quarters
|
|
|
2011 Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Revenues
|
|
$
|
36,138
|
|
|
$
|
25,152
|
|
|
$
|
20,009
|
|
|
$
|
20,194
|
|
|
$
|
32,282
|
|
|
$
|
24,416
|
|
|
$
|
21,790
|
|
|
$
|
24,495
|
|
Operating income (loss)
|
|
|
3,754
|
|
|
|
(3,328
|
)
|
|
|
(3,747
|
)
|
|
|
(5,990
|
)
|
|
|
1,980
|
|
|
|
(2,767
|
)
|
|
|
(4,102
|
)
|
|
|
(1,649
|
)
|
Income (loss) before income taxes
|
|
|
3,870
|
|
|
|
(3,166
|
)
|
|
|
(3,527
|
)
|
|
|
(5,832
|
)
|
|
|
2,060
|
|
|
|
(2,690
|
)
|
|
|
(3,768
|
)
|
|
|
(1,670
|
)
|
Net income (loss)
|
|
|
3,846
|
|
|
|
(3,190
|
)
|
|
|
(3,549
|
)
|
|
|
(5,624
|
)
|
|
|
2,019
|
|
|
|
(2,765
|
)
|
|
|
(3,800
|
)
|
|
|
(1,652
|
)
|
Income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.20
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.09
|
)
|